Farm Business Tenancy UK — Agricultural Tenancies Act 1995 Guide for Landlords

What Is a Farm Business Tenancy? — ATA 1995 Qualifying Conditions

The Agricultural Tenancies Act 1995 (ATA 1995) defines a farm business tenancy as a tenancy that meets two conditions (s.1 ATA 1995): (a) the business conditions: at the start of the tenancy, all or part of the land comprised in the tenancy must be farmed for the purposes of a trade or business, and this must continue throughout the tenancy; the tenant need not carry on only agricultural activity — diversified farm businesses (including rural tourism; bed and breakfast; farm shops; equestrian activities; renewable energy) remain eligible for FBT status provided the land is still farmed as part of a business; (b) the agriculture condition OR the notice conditions: (i) the agriculture condition: the character of the tenancy must be primarily or wholly agricultural at the beginning of the tenancy; OR (ii) the notice conditions: both the landlord and tenant must have exchanged notices (before entering into the tenancy or, in the case of a written tenancy, before it became binding) identifying the tenancy as a farm business tenancy within the meaning of the Act; if the notice conditions are met, the ATA 1995 applies even if the tenancy is not wholly or primarily agricultural at the start. Exclusions from ATA 1995: (i) tenancies that are Agricultural Holdings Act 1986 tenancies (AHA 1986) — all tenancies of agricultural holdings created before 1 September 1995 remain governed by AHA 1986 (unless they have been validly surrendered and re-granted as ATA 1995 tenancies); (ii) tenancies governed by the Landlord and Tenant Act 1954 (business tenancies); (iii) tenancies of agricultural land that do not carry on any agricultural business. No requirement for a written tenancy agreement: an FBT can be created orally or in writing; however, a written agreement is strongly recommended to record the rent, the term, the conditions, and to avoid disputes about the scope of the tenancy and tenant's obligations. Term: an FBT can be for any period agreed between the landlord and tenant — from a single crop season to a long-term tenancy of many years. There is no minimum or maximum term imposed by the Act.

• Business conditions: the land must be farmed for a trade or business at the start and throughout the tenancy; diversified farm businesses (equestrian; tourism; renewable energy) remain eligible provided the land is still farmed
• Notice conditions alternative: landlord and tenant can exchange pre-tenancy notices identifying the tenancy as an FBT — if these are exchanged, the ATA 1995 applies even if the tenancy is not wholly agricultural at the start
• AHA 1986 protection: all agricultural tenancies created before 1 September 1995 are still governed by the AHA 1986 regime and are not FBTs — the two regimes coexist on many holdings
• No written agreement required: an FBT can be oral, but a written tenancy agreement is strongly recommended to record all key terms and avoid disputes
• No minimum term: an FBT can be for any agreed period — from a seasonal grazing licence to a multi-year tenancy; the term determines the notice requirements on termination

Rent Review Under the ATA 1995 — Market Rent and Upward/Downward Review

The ATA 1995 provides a statutory mechanism for rent review that differs fundamentally from the AHA 1986 regime. ATA 1995 rent review: (a) frequency: rent can be reviewed every three years (s.9 ATA 1995) — either upward or downward to the open market rent; (b) trigger: either party can trigger a rent review by serving a statutory rent review notice at least twelve months before the review date and not before the end of the first three years of the tenancy or three years since the last review; (c) open market rent: the rent is reviewed to the rent at which the holding might reasonably be expected to be let on the open market by a willing landlord to a willing tenant — this is an upward or downward review based on market evidence (unlike the AHA 1986 which had a more constrained review formula); (d) arbitration: if the parties cannot agree the revised rent, either party can refer the matter to a chartered surveyor arbitrator appointed under the ATA 1995; the arbitrator must be a fellow of the Royal Institution of Chartered Surveyors (RICS) agreed between the parties or, failing agreement, appointed by the President of the RICS. Disregards in rent review: (s.10 ATA 1995): the arbitrator must disregard from the open market rent review: (i) any increase in value attributable to tenant's improvements carried out with landlord's consent and within the last 25 years; (ii) any decrease in value attributable to the tenant's failure to repair where the obligation is on the tenant; (iii) any benefit the tenant has from any reduction in rent under s.13 (compensation for loss of benefit). Contrast with AHA 1986: the AHA 1986 rent review formula is more complex and involves a county structure rather than the open market — a key reason why many landlords prefer FBTs for new lettings. Tenant's right to trigger downward review: unlike many commercial leases (which are upward-only), an FBT tenant can trigger a downward rent review under the ATA 1995 if market rents have fallen — this is an important protection for tenants but a risk for landlords if agricultural values decline.

• 3-yearly statutory review: either party can trigger a rent review every 3 years (s.9 ATA 1995) — or at a shorter interval if specified in the written tenancy agreement
• Open market rent: the review standard is the rent on the open market between a willing landlord and willing tenant — upward or downward (unlike upward-only commercial leases); market conditions determine the outcome
• 12-month trigger notice: the rent review notice must be served at least 12 months before the review date; failure to serve in time misses the review cycle
• RICS arbitrator: if no agreement is reached, either party can refer to a RICS arbitrator; arbitration costs can be significant for smaller holdings
• Tenant improvements disregarded: the arbitrator must ignore any increase in rental value attributable to tenant-funded improvements within the last 25 years — this protects tenants who have invested in the holding

Termination of an FBT — Notice to Quit and Succession

The notice to quit provisions under the ATA 1995 are much simpler than the AHA 1986, which had complex succession and 'incontestable' notice provisions. ATA 1995 fixed-term tenancies: a tenancy for a fixed term expires automatically at the end of the term without the need for a formal notice to quit — this is a significant advantage for landlords compared to the AHA 1986, where even fixed-term tenancies gave rise to succession rights. Fixed-term tenancies for more than 2 years: s.5 ATA 1995 provides that a fixed-term tenancy for more than 2 years does NOT expire automatically at the end of the term — instead it continues as a periodic tenancy unless the landlord or tenant has served a written notice to quit at least 12 months (and not more than 24 months) before the term date. A tenancy for exactly 2 years or less expires without notice. FBT periodic tenancies: a periodic FBT (e.g. from year to year) requires a written notice to quit of at least 12 months (and not more than 24 months), ending at the end of a tenancy year. No succession rights: unlike the AHA 1986 (where there was a statutory succession right for close relatives — since removed for most new successions but still existing for some older tenancies), there are no succession rights under the ATA 1995 — the tenancy simply ends on death or at the end of the term. Contrast with AHA 1986 notice to quit: under AHA 1986, notice to quit a yearly tenancy requires 12 months' notice; the tenant can respond with a counter-notice requiring arbitration of specified statutory grounds; the landlord must prove one of the eight 'incontestable' grounds or that the notice is valid for one of the 'contestable' grounds; this is much more complex and expensive than the ATA 1995 regime. Surrenders and variations: an FBT can be surrendered by the tenant or surrendered by operation of law; any surrender of an AHA 1986 tenancy and regrant should be carefully considered — once surrendered, the AHA 1986 protection is lost permanently; specialist advice essential.

• Fixed term ≤ 2 years: expires automatically at the end of the term — no notice required; no continuation; the holding reverts to the landlord on the term date
• Fixed term > 2 years: does NOT expire automatically; landlord or tenant must serve a written 12-24 month notice to quit before the term date or the tenancy continues as a periodic tenancy
• Periodic FBT: 12-24 month written notice to quit is required, expiring at the end of a tenancy year — much simpler than the AHA 1986 which requires arbitration for most notices
• No succession rights: FBTs give no statutory succession right to close relatives on the tenant's death — the tenancy ends; this is a major difference from (pre-1995) AHA 1986 succession tenancies
• AHA 1986 surrender risk: surrendering an AHA 1986 tenancy in exchange for a new FBT permanently removes the statutory protection of the older regime; specialist advice is essential before any surrender and regrant

Tenant Compensation for Improvements — ATA 1995 Regime

One of the most significant features of the ATA 1995 for agricultural landlords is the tenant's right to compensation for improvements at the end of the tenancy (ss.15–27 ATA 1995). This is often underestimated by landlords and can result in significant end-of-tenancy claims. ATA 1995 improvement compensation: (a) qualifying improvements: the tenant has a statutory right to compensation at the end of the tenancy for improvements to the holding that were: (i) carried out during the tenancy by the tenant; and (ii) either (A) routine improvements to which the landlord gave written consent under s.17, or (B) physical improvements on the holding to which the landlord gave written consent (s.17), or (C) planning permission obtained by the tenant (s.18); and (iii) not compensation already agreed otherwise. Landlord's consent: a landlord can give consent to an improvement conditionally (e.g. on the tenant meeting specified conditions for carrying out the work) or unconditionally; a landlord who refuses consent without good reason risks the tenant applying to arbitration for a direction that consent be given (s.19 ATA 1995). Amount of compensation: the compensation payable is the increase in value of the holding at the end of the tenancy as a result of the improvement — assessed as the amount by which the value of the landlord's reversion has been increased (s.20 ATA 1995). Tenant's improvements after notice to quit: compensation claims are frequently made by outgoing tenants for improvements carried out during a long tenancy — landlords should track all consented improvements and be prepared for a valuation at the end of the tenancy. Contracting-out: unlike the AHA 1986 (where certain provisions cannot be contracted out), the ATA 1995 allows the parties to agree in the tenancy agreement that no compensation will be payable for improvements — this is known as a 'no compensation' clause; specialist advice is required on whether such clauses are enforceable in the specific context. Scotland: the Agricultural Holdings (Scotland) Act 2003 introduced the Limited Duration Tenancy (LDT — minimum 25 years); Short Limited Duration Tenancy (SLDT — fixed term up to 5 years); Modern Limited Duration Tenancy (MLDT — minimum 10 years); and Repairing Tenancy as distinct Scottish agricultural tenancy types with their own review, termination, and compensation rules.

• Tenant's right to improvement compensation (ss.15–27): at the end of the FBT, the tenant can claim compensation for improvements they carried out with the landlord's written consent — assessed as the increase in value of the landlord's reversion
• Landlord's consent is required: the tenant must obtain written consent before making improvements for which compensation will be sought; the landlord can give conditional consent; refusal without reason may be challenged by arbitration (s.19)
• Amount: the increase in the value of the landlord's reversion as a result of the improvement — assessed at the end of the tenancy; this can be significant for infrastructure improvements (drainage; buildings; fencing)
• Contracting-out: the parties can agree a 'no compensation' clause in the tenancy agreement for improvements; whether this is effective in all circumstances requires specialist advice
• Scotland: the AH(S)A 2003 introduced the LDT (≥25 years); SLDT (≤5 years); MLDT (≥10 years); and Repairing Tenancy — all with their own distinct regimes for rent, termination, and compensation; take specialist Scottish agricultural law advice

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